China Telecom, China Unicom Face Anti-Monopoly Probe

Nov. 10 – China’s National Development and Reform Commission (NDRC) is investigating China Telecom and China Unicom – two of the country’s major telecommunications operators – over suspected monopoly in the broadband internet market. The government’s unusual anti-monopoly probe into its state-owned enterprises may lead to support for bringing in more effective competition to the country’s telecommunications sector – one of the Chinese marketplaces still under tight government control.

Regulators believe both China Telecom and China Unicom are using their dominant market position – together occupying roughly two-thirds of the current market share – to charge their competitors higher fees for broadband access while offering lower prices to non-competitors, said Li Qing, deputy director of the NDRC’s Price Supervision and Antimonopoly Department, in an interview with China’s state-run China Central Television yesterday.

“According to the Anti-Monopoly Law (AML), we call such behavior price discrimination,” Li explained.

The price discrimination has caused poor inter-connection capacity between the two companies’ networks and low internet speeds. According to Li, the bandwidth available for the inter-connection between the two networks is currently 261.5 gigabytes, a small capacity compared to the two companies’ collectively owned-bandwidth of 1,078 gigabytes that is available for connecting China to the international internet.

In addition to low capacity, inter-connection efficiency also remains low. The rates of both inter-connect delay and packet loss are still too high to meet official requirements, according to related statistics for the first nine months of this year. The incomplete inter-connection has largely restricted China’s broadband speed, which is only around 10 percent as fast as the speed in developed countries such as the United States, the United Kingdom and Japan.

If the NDRC’s accusation is upheld, China Telecom and China Unicom may both face a fine amounting between 1 percent and 10 percent of the two companies’ total business turnover last year. This means the two telecommunications giants – which both have business turnover exceeding RMB30 billion according to Li – may end up paying billions of RMB if they are confirmed as monopolists in the market.

The anti-trust probe into China Telecom and China Unicom marks a rare case where Chinese regulators use the AML to accuse large state-run companies of monopolistic actions, possibly reflecting China’s determination to improve the country’s poor internet quality at a faster pace.

“If we can bring about effective competition to the market, the prices to access the internet could be lowered by 27 percent to 38 percent in five years, and internet users could save RMB10 billion to RMB15 billion thanks to the lower internet charge,” Li said.

Fully realizing the drawbacks of monopoly in its telecommunications sector, China has been striving to force more competition into the market. The establishment of China Unicom itself was part of a government-led effort to end China Telecom’s monopoly back in the early 1990s. However, 17 years after the market reform and following a series of mergers and acquisitions among those state-owned telecommunications companies, China’s fixed line and broadband market still seems to lack competition: it is now “duopolized,” if not simply monopolized.

Despite its eagerness to create more free competition, China is still hesitant to fully open up its telecommunications industry to foreign investors. According to the government-issued Foreign Investment Catalog (2011 Draft for Public Opinions), foreign investment into the telecommunications sector is still “restricted.” Foreign holdings in Chinese telecommunications companies providing value-added telecommunications services cannot exceed 50 percent, and holdings in basic telecommunications service companies cannot go beyond 49 percent.

In reality, even a 49 percent presence in a Chinese telecommunications company is a remote dream for foreign investors. In spite of boasting more advanced technology and equipment, foreign telecommunications operators are seeing barriers to their China expansion due to the Chinese government’s reluctance to relax its control over the “strategically important” sector. United Kingdom’s Vodafone, the company that once hoped its shares in China Mobile could go up to 20 percent by 2005, finally decided to sell off its 3.2 percent stake in China Mobile last year; South Korea’s SK Telecom also sold its 3.8 percent stake back to its partner China Unicom in 2009; Spain’s Telefonica, although currently holding a 9.7 percent stake in China Unicom, is still far away from being influential; and China Telecom, with an overwhelming market share in the south, still has no foreign injection so far at all.

Therefore, while the anti-trust investigation this time has definitely revealed China’s intention to create a more robust telecommunications market, it is still hard to tell how exactly the government wants to end the monopoly – by simply regulating its state-owned companies, or allowing further openness? The future trend of China’s telecommunications reform could define, or deny, numerous potential opportunities for foreign investors who seek to enter the world’s most populous telecommunications market.

Meet the firm behind our content. Dezan Shira & Associates have been servicing foreign investors in China, India and the ASEAN region since 1992. Click here to visit their professional services website and discover how they can help your business succeed in Asia.

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